By Hussein Sayed, Chief Market Strategist at FXTM
Chinese stocks led Asian markets higher at the start of the trading week with the Shanghai Composite trying to retest this year’s highs, following gains of more than 2.5%.
The three major US stock futures indices were all in the green, WTI crude traded 1% higher, while Gold and the US Dollar were flat after slight declines earlier in the session.
The issue of medium-term loans worth 700 billion Yuan by the People’s Bank of China (PBOC) and the rollover of loans maturing in August were the main drivers of stocks, in another sign that monetary policy continues to have a significant influence on investor sentiment. However, Japanese equities were under pressure after GDP data showed the economy shrank 27.8% in the second quarter, a record contraction.
The delayed US-China trade deal review and President Trump issuing an executive order forcing China’s ByteDance to sell its US TikTok business did not have any material impact on markets. It seems politics is still taking a backseat when it comes to forces driving markets, as monetary policies continue to provide the necessary support to prevent any negative shocks to the financial system.
The Federal Reserve remains determined to support the economy well beyond the time when lockdowns are over. But investors want to know what policy trajectory the US Fed will pursue in the short and medium-term because at this point in time, it remains somewhat vague. That’s what makes Wednesday’s Federal Open Market Committee (FOMC) minutes release a big event for investors.
Fed officials, including Chair Jerome Powell, have indicated the need for a more straightforward method of forward guidance, in which market participants can link interest rate projections to a set of economic metrics. Will the FOMC minutes reveal when such a policy will be implemented?
Quantitative easing (QE) is also of great importance, especially after long-dated US Treasury yields shot up significantly on Friday following a record amount of 30-year bond issuance.
With more bond supply likely to hit the market as fiscal policymakers look to fund their spending packages, the Fed needs to remain the key player in US Treasuries to keep yields under control. Otherwise, expect to see a sharp spike in volatility that’s likely to drag equities lower.
Rising bond yields, on the other hand, should lend some support to the US Dollar, although we have not seen such a reaction so far. Most probably, investors remain in wait-and-see mode until they learn about the Fed’s next action plan.
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